Home Renovator Stocks: A Bit of a Reprieve

The do-it-yourself home improvement market received a bit of a reprieve in the second quarter from a combination of better weather and fiscal stimulus and that could give a lift to Home Depot Inc (HD). and Lowe’s Cos. (LOW) in the near term, according to analyst Matthew Fassler of Goldman Sachs.

“Better fundamentals will continue to face off against macro headwinds; tangible challenges from slower housing turns are likely peaking, but recurring concerns about the fundamental health of the mortgage market, perhaps overdone but still uncertain, loom large in investors’ minds,” he wrote in a note to clients.

Fassler put his price target and estimates for Home Depot under review but raised his one-year target on Lowe’s to $27 from $26, where he sees “modest additional upside to this level” as housing activity shows signs of bottoming.

Lowe’s improved results in the second quarter show the benefit of economic stimulus and outdoor sales trends, he said. His price target is based on a 10% reduction to a long-run normalized value on Lowe’s of $30, based on a 15 times multiple of normalized forward earnings per share of about $2.

Meanwhile, Home Depot reported second-quarter sales of 71¢ per share, 8% lower than the same quarter a year earlier. UBS analyst Brian Nagel said the better-than-expected results "offer further evidence of stabilizing trends in the home retail sector." However, he continues to prefer Lowe's, which he rates as a "buy," while giving Home Depot a "neutral" recommendation.